7-1 Consumer Surplus

Willingness to Pay

• Welfare economics: the study of how the allocation of resources affects economic well-being.

• Willingness to pay: the maximum amount that a buyer will pay for a good.

• A buyer's willingness to pay is their measure of how much they value a good.

• Consumer surplus: the amount a buyer is willing to pay for a good minus the amount the buyer actually pays for it.

• The consumer surplus measures how much benefit buyers receive from participating in a market.

Using the Demand Curve to Measure Consumer Surplus

• A marginal buyer is a buyer who'd leave if prices were higher and stays for a certain, attainable price.

• A marginal buyer is determined by the price given by the demand curve, showing the buyer's willingness to pay.

How a Lower Price Raises Consumer Surplus

• Buyers would prefer to pay less for the goods they buy, so lower prices leave them better off.

• When a market consists of a lot of buyers when a buyer drops out it forms a demand curve because the effect is so minuscule.

What Does Consumer Surplus Measure?

• Consumer surplus measures the benefit that buyers receive from a good as the buyers themselves perceive it. It allows people to make judgments about how desirable a market outcome is.

• Economists tend to assume that buyers make rational decisions, but this is not always the case. They also assume that all preferences should be respected, making economists great judges of the benefits of buying certain goods.

7-2 Producer Surplus

Cost and the Willingness to Sell

• Cost: The value of everything a seller must give up to produce a good.

• The cost measures the willingness to sell services.

• Producer surplus: the amount a seller is paid for a good minus the seller's cost of providing it.

Using the Supply Curve to Measure Producer Surplus

• Marginal sellers are the first to leave markets if the prices are lower.

• The producer surplus in a market is measured below the price and above the supply curve.

• The sum of the producer surplus of all sellers is the total area.

How a Higher Price Raises Producer Surplus

• Sellers produce more surplus and new sellers enter markets as prices rise.

• Producer surplus and consumer surplus are similar and often considered together, as one term.

7-3 Market Efficiency

The Benevolent Social Planner

• The Benevolent Social Planner is a powerful, well-intentioned dictator. They want to improve society's economic well-being.

• The total surplus is the sum of consumer and producer surplus. It naturally measures society's well-being.

• Consumer surplus = value to buyers - the amount paid by buyers.

• Producer surplus = amount received by sellers - cost to sellers.

• Total surplus = (vale to buyers - the amount paid by buyers) + (amount received by sellers - cost to sellers).

• Efficiency: the property of a resource allocation maximizing the total surplus received by all members of society.

• Equality: the property of distributing economic prosperity uniformly among the members of society.

Evaluating the Market Equilibrium

• Free markets allocate supplies of goods to buyers who'll value them the most, which is measured by how much they're willing to pay. Free markets choose sellers depending upon who produces goods at the lowest cost. The quantity of goods is then produced at a rate that maximizes the sum of the consumer and producer surplus.

7-4 Conclusion: Market Efficiency and Market Failure

• Markets are not always efficient but they're definitely competitive.

• Market power involves someone's ability to influence prices. This power can cause markets to become inefficient.

• Externalities are when a market experiences casualties such as the side effects of agricultural pesticides.